What You and Your Business Need to Know for Year-End Planning and Beyond

Guest article by Eide Bailly LLP

In December 2017, Congress passed the largest single piece of tax legislation since 1986. Now, as year-end approaches, many businesses are wondering how these new tax laws will affect them at the close of the 2018 tax year and beyond.

On December 4, Adam Sweet, Principal with Eide Bailly’s National Tax Office, shared how tax reform will affect 2018 year-end planning and beyond with a group of Chamber members. Here are a few of the highlights.

Choice of Entity

The new tax legislation introduced a flat 21 percent corporate tax rate. “Many businesses are asking if they should become a C corporation,” said Sweet. “After all, the new 21 percent rate is very enticing.”

Sweet outlined the differences between a C-corporation versus a pass-through entity. “There are several items to consider when making the decision about entity choice. It’s about more than a lower rate” he said. “It’s incredibly important that all business owners sit down with their tax professional to discuss whether changes are advisable.”

Section 199A

One of the key provisions of tax reform was Section 199A, which provides a 20 percent deduction for “qualified business income.” Sole proprietors, Partners, S corporation shareholders, estates and trusts all may qualify, but not C-corporations.

The 199A provision hinges on the concept of “qualified business income.” Due to the incredibly broad nature of the term, there was confusion around how to interpret this aspect of the law. This led Congress and the IRS to add further clarification to what exactly makes up “qualified business income” (QBI).

QBI is not:

•     Investment income (capital gains, interest, dividends, etc.)
•     Income from certain businesses (lawyers, doctors, accountants), unless you have taxable income below threshold levels
•     “Any trade or business where the principal asset of such trade or business is the reputation of one or more of its employees or owners.”
  •         Income from endorsing products or services
  •         Licensing or receiving income from use of individual’s name/likeness
  •         Appearance fees

“The narrowed definition of income from someone’s reputation is very taxpayer friendly,” said Sweet, “unless you’re a famous person.”

So how do you prepare for year-end with the 199A deduction? Sweet noted the following:

•     Manage taxable income
•     Remember individual owners (not the business) claim the 199A deduction.
•     Taxpayers must separately track each trade or business and track the various factors that can limit the deduction.
•     Partnerships and S corporations are required to provide QBI information to owners on Schedule K-1, allowing owners to aggregate and calculate various limitations.
•     Beware of IRS penalties, which can be assessed at a lower threshold when 199A is involved.

Opportunity Zones

A new focus area included in the Tax Cuts and Jobs Act are qualified opportunity zone investments. State and local governments, working with the Treasury Department, have designated certain low-income areas as qualified opportunity zones starting in the 2018 tax year.

“Taxpayers can elect to defer eligible capital gain from an asset sale or exchange with an unrelated party by investing into a qualified opportunity fund,” said Sweet.

The potential benefits include gain reduction and deferral on the original sale transaction until 2026 and 100 percent gain exclusion for post investment appreciation if you hold the qualified opportunity fund investment for 10 years.

As a note, Moorhead, West Fargo and Fargo have opportunity zones within their city limits.

Individual Considerations

Sweet reminded the audience to be aware of a few items related to personal tax planning. The following deductions and credits have been limited, lost or revised:

•     Standard Deductions
•     Medical Expenses
•     State and Local Taxes
•     Home Mortgage Interest
•     Charitable Donations
•     Casualty and Theft Losses
•     Miscellaneous 2 percent Deductions
•     Child Tax Credit
•     Alimony
•     Moving Expenses

He also reminded the audience to pay close attention to entertainment expenses. Under tax reform, entertainment expenses are no longer deductible. This includes membership dues for a club organized for business, pleasure, recreation or other social purposes. There is also an increased compliance burden for businesses, who will now need to start tracking business meals separate from entertainment.

The Moral of the Story

The new tax law is complex and has many moving pieces to consider. While some guidance has come forward since the law’s inception, there is still a great deal of gray in how this law will impact businesses and the people that own them.

“If you’re a business of any size, now is the time to meet with your business advisor,” Sweet said. “There are many items in the new tax law that can be taken advantage of now, if planning is done correctly.”